You are going through college in hopes of getting a good job once you graduate. Fat paychecks every two weeks, and a life without spaghetti and Ramen! Well, I have some decent advice on what to do with your money once you start your career. No, it is not buying the sweet 1080p entertainment system. It’s the boring stuff. The smart stuff. The decisions that you’ll be glad you made when you need the money.
First steps, get rid of your debt. The average student leaves a four-year college with $20,000 in student loan debt. Also, the average undergraduate student has roughly $2,000 in credit card debt. With a full-time job after graduation, you should significantly reduce your debt. Paying off your credit card should be your first priority or else that balance will simply keep adding up. Afterwards, you can work on paying off your student loans while also taking care of future concerns.
Your next concern should be retirement. But wait, you just graduated! You want a car! Retirement is so far away! Starting retirement savings early is the easiest way to have plenty of money when you finally decide to leave the workforce. The later you start and the more you put it off, the harder it will be to save enough money. With shrewd investments and time, you can earn a lot more than you ever could if you start your retirement at 40. Also, when would you rather worry about retirement? Now? Or when you have a family to pay for?
A 401(k) is a pre-tax retirement account. Pre-tax means that whatever you add to your 401(k) is subtracted from your taxable income. You pay less taxes now and then pay them when you withdrawal money later on. Most companies that provide 401(k)s to their employees match a certain percentage of your contribution. This is free money! It is an automatic doubling of your retirement money. It is highly encouraged that you contribute enough to get the full company match, or else you are throwing away free money. If you are planning on staying at a company for a few years, starting a 401(k) as soon as possible is a smart decision. And should you move the account can be rolled over to your new employer.
The next thing you should spend your money on is a Roth IRA. This is a post-tax retirement account. You pay tax now, but don’t pay when you withdraw the money. And given 40 or 50 years of roughly 10 percent average growth (if you invest the money in a low-cost index fund), you’ll be glad that Uncle Sam isn’t touching your gains.
One of the benefits of the Roth is that you can take out your contributions without penalty. Your Roth can act as an emergency fund if required. If you’ve been putting $5,000 away for the past five years and suddenly need the money. You can take out your contributions at no loss, no taxes and no penalties. The rules kick in when you want to withdraw your earnings. You cannot withdraw earnings from your Roth without severe penalties until you are 60.
A traditional IRA works reversely. It is a pre-tax vehicle like the 401(k), but your earnings are taxed. It cannot act as an emergency fund. There are some tax benefits with a traditional IRA. You reduce your taxable income now, and you’ll likely be in a lower tax bracket during retirement when you do pay taxes. The earlier you start your retirement account, the more sense the Roth IRA makes over a traditional IRA.
After your debt is settled and your retirement is considered, an emergency fund should be your next priority. You should set aside roughly six months of pay in a pretty liquid account. Liquid means how quickly it can be converted to cash. Stocks and bonds are much less liquid than a savings account. Savings accounts and certificates of deposit are very liquid vehicles. This money should be used in case you lose your job. If you are injured and unable to work, this money can float you comfortably until you get settled once again.
So, there is some sound financial advice you should consider once you graduate. Get rid of debt, consider retirement, set up some money for an emergency. When the time comes and you need the money, you will be glad you spent one less night at the bar, a few less nights eating out and are financially secure.